Frank Field MP
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Beating Fear . . .

7
Jan
In the pit of my stomach I feel a deep unease about the Government’s strategy to counter what is euphemistically called a recession. I suppose the main cause of my anxiety is what might best be described as the Government’s inability to appreciate that there is a psychological side in economic activity, and this side is never more important when an economy may be going into deep recession. One way of describing this would be for the public being caught in a mighty huge panic. The key test of Government is preventing the panic becoming the major driver of the recession.

This side of market behaviour was pretty rampant during the boom years when people were desperate not to be gazumped when buying a new home. I saw it at its worst under the last Labour Government, when the Government then tried subsidising the prices of major items to dampen down inflationary expectations.

I argued that the programme should be as generous as possible, and that it should be generous enough that most of the money would not be drawn on. The inflationary expectation would have been cut at the root.

What in fact happened was the programme was half hearted, inflation ripped through the economy and tax-payers were left with a nice hefty bill for the subsidy programme.

The first evening when news of Northern Rock broke, and after witnessing people queuing to take out their savings, I thought we were at similar point where panic could take root. I was amazed that it took from the Thursday evening until the following Monday evening before the Government gave the guarantee over deposits, allowing the 24 hour media to broadcast peoples’ growing apprehension.

During no move since has the Government been able to get itself ahead of the curve, and thereby perhaps influence the course of events. The latest example is over VAT.

It was a fatuous move from the very beginning. And when we had a chance in Parliament sometime before Christmas to debate it I voted against, making a plea that the billions being borrowed to finance the VAT cut should be channelled into new forms of credit for viable businesses who might otherwise go under in the credit crunch.

Weeks and weeks later the Government still hasn’t announced how it can throw extra lifelines to viable companies who are being denied a working capital from the banks. Giving the banks more assets for capitalisation is almost as pointless as the VAT cut. The Government now has a small clutch of nationalised banks. Why isn’t it using them to get credit out to viable firms?

This failure alone will result in unemployment higher that it need otherwise be. Indeed the Chancellor has revised his incredibly optimistic take on an economic downturn which will be on the rebound by the middle of next year.

The Pre-Budget Report listed the expected levels of claimant unemployment by the end of 2009-10. Partly because the crisis is so serious, but also because the Government has been pitifully slow in responding (only looking quick-footed in comparison with the Tories) my fear is that the unemployment level predicted for the end of 2010 will be met, at that very point next year when the Government had confidently predicted the beginnings of recovery.

And yet the pressure is on in the media, and no doubt in Whitehall, for the Bank of England to cut further interest rates. Again the move will be worse than fatuous. It will harm even further savers.

It is quite clear that the bank rate lever is no longer connected to those parts of the economy which most need help i.e. firms requiring credit. Further cuts in bank rate will reduce the income of pensioners dependent to some extent in supplementing their income by savings interest. Why do politicians make so much fuss about the urgent need for Keynesian reflation while joining in the chorus to cut the income of the vast majority of pensioners? It doesn’t make sense to me.

Andrew Adonis is one of the most gifted ministers in this Government and his ability to think strategically in the long-term is a great prize for the Brown Government. Can he be right in putting so much energy into building a new rail network? For more years than I can remember I have been a commuter between Euston and Birkenhead while major reconstruction to the line has been taking place. For years now the defence of the crap service Virgin have given us is that this huge capital upgrade is underway. This was supposed to have been completed in the middle of December. As I write there has not been a proper service today and as I came back from Birkenhead on the 7 a.m. train on Tuesday morning it was diverted all round Klondike and didn’t get into London until 10.30 - a good hour and a half late. Given the appalling manner in which this capital investment programme in the railways has been implemented, does anyone now believe we have the expertise for such a major investment along Andrew’s lines? Why is it that the French and the Germans have brought up the standard of our water and gas industries but have kept well clear of the rail franchises? Isn’t this perhaps the one area of the British economy which we could have done with a bit of foreign ownership expertise and discipline?
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